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Dollar cost averaging

September 7th, 2006 at 10:59 pm

I've been trying to get a handle on all the different investment terminology, and in the process, I've learned a new concept.

Dollar cost averaging (DCA).

When you make small, periodic investments over time, you tend to buy more shares at a lower cost.

Brilliant!

In light of this, I've changed the auto contribution for my Roth to weekly instead of monthly. At $170 per week until April 9, 2007, this should max out my $4K 2006 contribution, and also put me on track for my 2007 contributions. I'll have to calculate whether my year-to-date income savings can handle this rate of deduction, though. I'll do that this weekend.

I also feel better (somewhat) about the fact that share prices (for the Vanguard 2050 Target Retirement Fund where I've invested my Roth) have fallen in the past couple of days. Losing over $50 in the first week of starting my first investment is not exactly encouraging, although I know intellectually that it doesn't really matter.

But still, I should look into who's managing the fund, and possibly switch out. My 403(b) will be going into the same fund, and I'm thinking fund diversification is probably better.

I'm going to start building a Fund Watch list. I have over $10K in seed money that needs to go somewhere. I should be able to buy two funds with this money, although I think I'll only get one, at least until my emergency fund ($5K goal) is built up.

Oh, and FYI... I just calculated my net worth, and against my expectations, it is actually positive, even with my $22K in student loans. I'm worth nearly $5K, baby.

Rock!

9 Responses to “Dollar cost averaging”

  1. drew1980 Says:

    Is your entire IRA invested in one fund? You might want to spread it out between 3 or 4 to start with.

  2. Broken Arrow Says:

    She mentioned Vanguard's Target Retirement Fund, which should be spread across 4 index stock funds.

    Anyway, excellent work, Mimi.

  3. amberfocus Says:

    drew1980: This particular Roth is worth $6100+. The minimums for investing in Vanguard funds are $3000, so if I split this Roth over two funds, there's a chance I might go under the minimum if the share price drops.

    Broken Arrow: I just looked up the allocations for this fund. They are:

    - Vanguard Total Stock Market Index Fund: 73.0%
    - Vanguard European Stock Index Fund: 10.3%
    - Vanguard Total Bond Market Index Fund: 9.7%
    - Vanguard Pacific Stock Index Fund: 4.9%
    - Vanguard Emerging Markets Stock Index Fund: 2.1%

    Source: https://flagship.vanguard.com/VGApp/hnw/FundsHoldings?FundId=0699&FundIntExt=INT

    ~mimi

  4. LuxLiving Says:

    So with the allocations on that fund you ARE already diversified across the world stock wise and have bonds covered as well...now maybe not manager or fund wise, but you've covered a broad spectrum of sectors with the Retirement 2050 fund! It is disheartening to see a drop but remember that's when you are buying 'On Sale' when you DCA.

  5. LuckyRobin Says:

    You have to look at their long term rate of return. We've had Vanguard for over ten years now and it does very well. This year, yes it has been down, but this was after a ridiculously high climb that netted our 401K $3000 profit in 3 months. It was a correction we were expecting to happen based on the general state of the economy. I think if you look around, you'll find a lot of funds really took a nosedive, not just Vanguard's.

    I've gone through one plunge and recovery with them before and I have confidence that it will recover again. Their long term rate of return has always been consistently high since we started with them.

  6. Dido Says:

    Vanguard funds are great, quite low management fees, and a solid company reputation. With the Target funds, you are by definition diversified--remember a mutual fund in itself is diversified because it holds investments in a wide variety of stocks, and Target funds are funds of funds, increasing the diversity even more so. The downside about spreading out beyond that would be more annual fees until you're over the minimum for each fund. As your investments grow, you might want to look at other Target funds and do a little research across companies because different funds have different investment philosophies. I like Vanguard myself, but have also considered T.Rowe Price's funds, which are a bit higher in risk. Fidelity's, of course, have much more active investing strategies (and thus higher fees).

    While it can be fun to look at your returns on a daily/weekly basis, it can also be disheartening. After the novelty has worn off, you might find it easier to only check on a quarterly basis.

  7. Dido Says:

    PS also with the "fund of funds" approach, you already have diversification in *managers* too.

  8. baselle Says:

    At your age, with the student loans - excellent that your net worth is still positive!

  9. amberfocus Says:

    LuxLiving: Yeah, I'm glad I looked up the allocations. It seems to be a good spread, and even Emerging Markets is covered, which I didn't expect. I'm not sure what the Pactific Stock Index is, though. It's probably a risky fund, looking at the small allocation.

    LuckyRobin: I guess it's good that I'm not buying shares at the peak of the climb, then! I know it'll recover, I just need some patience. And faith in this brand new fund that was created mere months ago and has no performance record whatsoever.

    Dido: Interesting that you bring up other investment firms. Once I'm ready to get down-and-dirty with planning my investments, I'll definitely study how Vanguard and the other company allocate their funds, and see if I can glean insights on how to custom design my own portfolio.

    baselle: I wish I could take all the credit for my positive net worth, but I can't. So much of it came from my father. I think I'll do an in-depth post on this in the near future, so I have it "on record", so to speak.

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